New Standard Impact Disclosures

While I respect all the work the Financial Accounting Standards Board (FASB) and the Emerging Issues Task Force (EITF) does, listening to their meetings is often about as enlightening as watching paint dry.  You know something is going on, but you can’t quite tell what it means until the end.  That was not the case for one item at the EITF meeting back in September.  Rather than send out an “official” announcement through the Commission’s communication channels, the Securities Exchange Commission’s (SEC) staff used the September EITF meeting to tell public companies they need to be more forthcoming in their disclosures about the impacts of three critical new accounting standards:

  1. Revenue Recognition
  2. Leases
  3. Credit Losses

The SEC basically said companies need to disclose the (material) quantitative impacts of adopting these new standards, or if they can’t, disclose why they can’t estimate the impacts.  Specifically, the SEC said that in the absence of disclosing the quantitative impacts, the following needs to be disclosed:

  1. A description of the effect of the accounting policies the company plans to apply
  2. A comparison to the application of current accounting policies for those transactions
  3. The status of the implementation project including matters yet to be addressed
  4. The implementation method that the company plans to use

This announcement will likely put many companies in a difficult position for the upcoming annual reporting season.  Consider the revenue standard; if a company does not know the impacts of adopting the standard less than 10 months out from the required adoption, the company better be in position to explain why it can’t do that and when it expects to be able to do it.  And I suspect the SEC will scrutinize the 2017 10-Qs for updates on that annual disclosure as soon as the company does know the impacts.

If you look at the leasing standard, the first question that comes to mind is, if you can put together a minimum future lease rental table, why can’t you estimate the present value of those payments to disclose what is going to hit your balance sheet.  If the answer is you are not sure of the population of leases subject to the new standard, the next logical question is with a lease definition being basically the same, how do you know your future minimum lease table is materially correct?  I don’t think anyone wants to get in a spitting match with the SEC over the accuracy of their current lease disclosures.

On the credit loss standard, banks and financial institutions will need to consider all the impacts, but the rest of the companies need to consider the impact on trade receivable bad debt expense.  If the answer is it doesn’t impact my company because we will basically compute bad debt the same way in the future, then the next question is are you computing bad debt wrong today, or are you planning to compute it wrong in the future? (This is the SEC we are talking about after all.)

And since these disclosures are part of GAAP, private companies should expect the same questions from their financial statement users because they will take the lead from the SEC is asking for more information.  Bottom line, everyone needs to be thinking long and hard about their disclosures on the impacts of these new accounting standards because the status quo won’t suffice any more.

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